diff --git a/mod/lti/db/upgrade.php b/mod/lti/db/upgrade.php
index f46b934e7b0..9f7bd5ff9ac 100644
--- a/mod/lti/db/upgrade.php
+++ b/mod/lti/db/upgrade.php
@@ -103,5 +103,56 @@ function xmldb_lti_upgrade($oldversion) {
     // Automatically generated Moodle v3.4.0 release upgrade line.
     // Put any upgrade step following this.
 
+    if ($oldversion < 2017111301) {
+
+        // A bug in the LTI plugin incorrectly inserted a grade item for
+        // LTI instances which were set to not allow grading.
+        // The change finds any LTI which does not have grading enabled,
+        // and updates any grades to delete them.
+
+        $ltis = $DB->get_recordset_sql("
+                SELECT
+                       l.id,
+                       l.course,
+                       l.instructorchoiceacceptgrades,
+                       t.enabledcapability,
+                       t.toolproxyid,
+                       tc.value AS acceptgrades
+                  FROM {lti} l
+            INNER JOIN {grade_items} gt
+                    ON l.id = gt.iteminstance
+             LEFT JOIN {lti_types} t
+                    ON t.id = l.typeid
+             LEFT JOIN {lti_types_config} tc
+                    ON tc.typeid = t.id AND tc.name = 'acceptgrades'
+                 WHERE gt.itemmodule = 'lti'
+                   AND gt.itemtype = 'mod'
+        ");
+
+        foreach ($ltis as $lti) {
+            $acceptgrades = true;
+            if (empty($lti->toolproxyid)) {
+                $typeacceptgrades = isset($lti->acceptgrades) ? $lti->acceptgrades : 2;
+                if (!($typeacceptgrades == 1 ||
+                        ($typeacceptgrades == 2 && $lti->instructorchoiceacceptgrades == 1))) {
+                    $acceptgrades = false;
+                }
+            } else {
+                $enabledcapabilities = explode("\n", $lti->enabledcapability);
+                $acceptgrades = in_array('Result.autocreate', $enabledcapabilities);
+            }
+
+            if (!$acceptgrades) {
+                grade_update('mod/lti', $lti->course, 'mod', 'lti', $lti->id, 0, null, array('deleted' => 1));
+            }
+
+        }
+
+        $ltis->close();
+
+        upgrade_mod_savepoint(true, 2017111301, 'lti');
+    }
+
     return true;
+
 }
diff --git a/mod/lti/lib.php b/mod/lti/lib.php
index c1e207a1d95..ab9df0ed60c 100644
--- a/mod/lti/lib.php
+++ b/mod/lti/lib.php
@@ -489,6 +489,11 @@ function lti_get_lti_types_from_proxy_id($toolproxyid) {
 function lti_grade_item_update($basiclti, $grades = null) {
     global $CFG;
     require_once($CFG->libdir.'/gradelib.php');
+    require_once($CFG->dirroot.'/mod/lti/servicelib.php');
+
+    if (!lti_accepts_grades($basiclti)) {
+        return 0;
+    }
 
     $params = array('itemname' => $basiclti->name, 'idnumber' => $basiclti->cmidnumber);
 
diff --git a/mod/lti/version.php b/mod/lti/version.php
index b5e0d842f71..a871ec1612a 100644
--- a/mod/lti/version.php
+++ b/mod/lti/version.php
@@ -48,7 +48,7 @@
 
 defined('MOODLE_INTERNAL') || die;
 
-$plugin->version   = 2017111300;    // The current module version (Date: YYYYMMDDXX).
+$plugin->version   = 2017111301;    // The current module version (Date: YYYYMMDDXX).
 $plugin->requires  = 2017110800;    // Requires this Moodle version.
 $plugin->component = 'mod_lti';     // Full name of the plugin (used for diagnostics).
 $plugin->cron      = 0;